FASB Caves in on Stock Options

As you might know, FASB tentatively concluded that stock-based compensation should be recognized as an expense in income statements and the amounts should be recorded at their fair value measured as of the date of the granting of the awards. This is a significant change in the accounting treatment of stock options. Draft rules should be released later this year with a final standard that is expected by 2004.

The decision is clearly a reaction to the clamor for more transparency in financial statements and mirrors what a number of Fortune 500 companies have already voluntarily decided to do.

For long-time readers of Practical Accountant, you might recognize the title of this column. It was the same one used for a February 1995 cover story in the magazine in which we reported, because of pressure, that the FASB had backed down and withdrew a proposal to expense stock options. At that time, we that arguments were successfully made that the FASB's proposal to expense stock options "would have been devastating by cutting reported earning as much as 50 percent and discouraging investors from buying stocks in high-growth companies that rely on options to attract talented personnel."

But, now, FASB gives such arguments short shrift.

Accounting and auditing standard setters, as evidenced by the dramatic swing in positions on stock options, have been under intense political pressure for a number of years. Standards are being influenced to a great extent by the constituencies having the most power at the time.

This all reminds me of a physics class I took in high school. The teacher, Mr. Isaacson, hung a heavy iron weight from a 30-foot ceiling. He stood up on a chair and pulled the weight just by his nose. He then illustrated an important energy theory using the weight as a pendulum. Mr. Isaacson released the weight and it swung across the room. We all started yelling as the weight came back right up to, but not touching, his nose. He just laughed and explained that as long as he released the weight without pushing it and didn't move his head forward, there was no chance it could smash his face.

Well, now we have a new player in the overall process, the Public Company Accounting Oversight Board. It will be quite interesting to witness how political pressures will influence it. Because after all, it looks like the FASB and the AICPA, after setting pendulums in motion with regard to accounting and auditing standards leaned forward and, although a number of years later, got hit with a vengeance when the pendulums swung back. I watch with eagerness.